Bloomberg News

Treasuries Set for Weekly Gain as European Debt Concern Lingers

December 16, 2011

Dec. 16 (Bloomberg) -- Treasuries were set for the biggest weekly advance in a month on concern European countries are struggling to contain the region’s debt crisis, boosting demand for U.S. government debt as a haven.

The benchmark 10-year yield was five basis points from a two-month low as France, Spain and Greece prepare to sell bills next week. BlackRock Inc., the world’s biggest asset manager, forecasts the European economy is set for a recession in 2012.

“The U.S. has attractions as a haven, so Treasury yields will continue to be weighed down,” said Yoshinori Shigemi, a strategist at RBS Securities Japan Ltd. in Tokyo, a unit of Royal Bank of Scotland Group Plc. “Market participants are focused on headlines about developments in Europe.”

The yield on the 10-year note was little changed at 1.91 percent as of 2:37 p.m. in Tokyo, according to Bloomberg Bond Trader prices. The 2 percent security due in November 2021 changed hands at 100 26/32. The rate reached 1.86 percent yesterday, the least since Oct. 5.

Ten-year yields have fallen 15 basis points, or 0.15 percentage point, since Dec. 9, set for the biggest weekly slide since the period ended Nov. 4.

France is scheduled to sell as much as 7 billion euros ($9.1 billion) of bills on Dec. 19. Spain and Greece will offer short-term government securities on Dec. 20.

European Central Bank President Mario Draghi said yesterday that a short-term contraction may be “unavoidable” for the euro-area economy.

‘Modest Contraction’

“I don’t think there’s anything that we’re going to see in Europe over the next couple of quarters other than probably, at the very least, a modest contraction,” Russ Koesterich, global chief investment strategist at the IShares unit of BlackRock, said in an interview with Bloomberg Television.

Federal Reserve Bank of New York President William C. Dudley said yesterday he doesn’t foresee the U.S. central bank taking additional steps to curb the impact of the sovereign-debt crisis in Europe.

“At this time, although I do not anticipate further efforts by the Federal Reserve to address the potential spillover effects of Europe on the United States, we will continue to monitor the situation closely,” Dudley said in prepared testimony.

U.S. Economy

Demand for U.S. bonds was limited before a government report today forecast to show consumer prices rose in November after dipping the previous month. The consumer price index climbed 0.1 percent month-on-month in November, according to a survey of economists before the Labor Department report.

Inflation-linked debt has returned 14 percent to investors this year, set for the biggest annual gain since 2002, an index compiled by Bank of America Merrill Lynch shows.

Manufacturing in the New York and Philadelphia regions has improved, according to regional central bank reports released yesterday. The New York Fed’s so-called Empire State Index reached its highest level since May, while the Philadelphia Fed’s gauge reached a level unseen since April.

“U.S. economic indicators are resilient,” said RBS’s Shigemi. “Should an easing of European tensions spur risk-on sentiment in markets and U.S. economic data show significant improvement, there’s a decent chance 10-year yields will touch 2.4 percent.”

The government is scheduled to sell $35 billion of two-year notes on Dec. 19, the same amount of five-year securities the next day and $29 billion of seven-year debt on Dec. 21.

The two-year notes being sold next week yielded 0.25 percent in pre-auction trading, compared with 0.28 percent at the prior sale in November. Investors bid for 4.07 times the amount for sale last month, more than the average of 3.38 for the past 10 auctions.

Indirect bidders, the category of investors that includes foreign central banks, bought 42 percent of the notes, the highest level since February 2010. Direct bidders, non-primary dealers buying for their own accounts, purchased 11 percent.

--Editors: Benjamin Purvis, Jonathan Annells

To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.


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